Hold Off Before You Jump On The Facebook Bandwagon

Maybe you think you should break your piggy bank, cash out your savings and dig for spare change under the couch cushions to get in on the ground floor of one of the biggest IPOs in years.

After all, you might become a millionaire, or, okay, maybe a thousandaire. (Read here for details on the company’s IPO filing.)

But there are several (or a hundred billion?) reasons to keep your feet on the ground, and your money in a safer investment.

History Says So

Whatever you do, don’t buy when the bell rings on IPO day. Stock prices during and shortly after IPOs are notoriously volatile. Just look back as far as, oh, 2011. Then, LinkedIn, Groupon and Zynga generated lots of buzz when they went public, and the first two are now trading below their opening-day prices.

Zynga is a different story. Right now, the FarmVille and Words With Friends maker is basking in the glow of the Facebook IPO filing, which showed that it is the social network’s top non-advertising revenue generator. So, this week, its stock price is actually trading higher than when it opened.

Exceptions Prove the Rule

Not all IPOs have bumpy up-and-down periods afterward. There are exceptions.

Google shares have risen pretty much since its opening day in 2004, and the company is now worth six times what it was worth then. But at that time, Google was valued at $27 billion. Since Facebook’s valuation is starting at $100 billion or slightly less, it will take investors a long time to double their money, let alone multiply it by six.

You’ll Have to Get in Line

First, remember that a bunch of Facebook shares already exist. As you’ll see from our chart last year, a lot of hands are already in the pie. Want to see who will get rich on the first day of trading? Look no further than that list. (And don’t forget these six people.)

But when it comes to the $5 billion in shares being offered in May, much of that is already accounted for, too, leaving regular Janes at the back of the line. The banks involved in the IPO will get to offer shares to institutional investors (think Fidelity, Vanguard), who’ll most likely grab 90% of them.

Bottom line: You won’t be able to buy the stock at a low price. You’ll have to buy it on the open market, and given the frenzy that normally surrounds similarly hyped IPOs, the price that first day will likely be much higher than the price in the following weeks and months.

Is Facebook Really All That?

True, Facebook now has more revenue than Google had profit when it went public in 2004. Back then, Google had just shy of $1 billion in revenue and just north of $100 million in profit, compared to Facebook’s $3.7 billion in revenue and $1 billion in profit in 2011. In that sense, Facebook seems like a better buy than Google when it debuted because its profits and revenues are big and only getting started.

On the other hand, these facts and figures might propel you to steer clear.

Facebook (which will go by the ticker symbol FB) could become the most expensive stock in the U.S., with the price being up to 25 times what the company makes in revenue; the ratio for most companies is 1.4 times revenue

The user base is beginning to plateau, leaving little room for growth

And don’t look to China, where Facebook has 0% presence, for expansion: The social network continues to struggle with the country’s government censorship requirements; meanwhile, Chinese social networks are gaining ground

So, You Still Want to Buy Facebook Stock

At LearnVest, we recommend you not buy individual stocks. It is always a better bet to spread your risk around, rather than having one bet demolish your whole nest egg.

But if you’re a diehard Facebook lover, remember up above where we said institutional investors like Fidelity and Vanguard will get 90% of the IPO shares? Well, that might be a way for you to get some Facebook action: Buy mutual funds with Facebook in their portfolios.

That way, you’ll benefit if Facebook goes up, and you’ll be protected if it goes south. And if you think the company could never stumble, we have two words for you: “Friendster” and “MySpace.”